The Unmentionable Solution to the Fiscal Cliff

Watch public policy even for a short while and the trick becomes evident. Whether we’re talking my hometown of Tiverton, Rhode Island, (population 15,780) or the federal government, the maneuver is to claim increasing amounts of power and make sure that’s the one thing not on the table when something has to give.

Thus, we get massive government interwoven like a terrible tumor around the vital organs of our economy. When the predictable illness follows, the two operations suggested, as if in opposition, are cuts on the spending side and increases on the revenue side.

Either, we’re told, is apt to drive the patient into shock. The government can take money out of the economy through taxes, or it can stop putting money into the economy via cuts. That’s not much of a choice.

We can argue efficiencies and concoct elaborate plans that best manage pain. But no matter how many news cycles it takes the politicians to bring the public around to the preordained conclusion, the final prescription will be that more room must be made for the growth of government. And that means raising the debt ceiling.

Notice what’s not included in this description. Money is not the only measurement of government. Intrusiveness — mostly regulation — is part of the tumor, too.

The mythic “balanced solution” to the U.S. government’s fiscal cliff problem has more tools than just cuts, taxes, and debt. Hidden discreetly below the table is the complete set of power grabs that make it more difficult for Americans to work and to spend. On the sharp end are rules that hinder our efforts to make that which we’re inclined to produce; on the dull end are rules that prevent us from buying that which we’re inclined to purchase.

To see the path away from the fiscal cliff, throw a century’s worth of data on a line graph, including GDP, government debt, total stock market capitalization, consumer credit, and (of course) inflation. The numbers are apt to blur in the eyes, but the lines bring things into focus.

There lies the ascendance of the stock market. Here national debt leaves inflation behind. Here are hints of the maturation of credit cards. And there stocks disengage from the harmonious half-century of gradual slope; they race ahead and fall back and race ahead and fall back and then completely absorb two trillion dollars in debt while GDP stagnates.

But interplay and blame are not the important topics, with mere months until the next horrid decision must be made. The relevant lessons may be found in the years overseen by Presidents Reagan and Clinton.

For all the justified adulation that conservatives cast back in time to Reagan, there’s no getting around the observation that the government over which he presided bent the upward inflection point more sharply into national debt. Only because the new millennium brought even greater lurches do the ‘80s look moderate on this count.

At the same time, however, tax cuts and trimming of government regulations made it easier to engage in productive commerce. In short, the government transported wealth from future generations, and public policy allowed the debtors’ ancestors to put the new money to productive use.

Such an economy runs with a powerful engine, but it’s hard to get off.

When the Clinton administration took the wheel, a different debt became the fuel. Finance-industry deregulation allowed new instruments to capitalize the future mortgage payments of people who were unlikely to be able to make those payments. The government-sponsored Fannie Mae and Freddie Mac gave this speculative source of future wealth the security of government backing, and investors brought a corresponding amount of their own resources into the mix.

But less of the newly active money went to GDP and more to investment. When the gamble crashed in the late ’00s, government stimulus inflated the stock market back to its previous heights while productive activity effectively stagnated.

The lessons are, first, that there is more wealth in the economy than is presently counted in dollars and, second, that wealth and inflation are mobile within the economy. The solution to our current conundrum is to draw unused wealth and productivity into circulation and wean ourselves from government debt.

The closed-door negotiations concerning the cliff shouldn’t be an exchange of revenue chips for spending chips; it should be an exchange of fiscal relaxation for regulatory loosening and safety-net tightening. Raise the debt ceiling for a while, but with the conditions that neither taxes nor spending increase and that Americans are given opportunity and incentive to invest and to be economically productive by means of policy changes that aren’t typically part of this conversation.

Such a strategy will be insufficient in the long run, mainly because it does not address the larger problem of a slowing population’s addiction to acceleration. But it might just give the patient enough time to tackle life’s tougher questions.

In this case, though, the devil isn’t so much in the details as in the existential imperative of a tumor to grow.

Until small government advocates get the actual legislation and regulation chapter and verse easily available to citizens and point out how such repeals will increase income, increase revenue, ease tax burdens, and reduce the difference between what we've promised and what we're taxing, this is all going to be theoretical.

I'm personally building the baseline tools necessary to do this (still crossing my fingers and hoping for a January 2013 start). I'm more than happy to work with anybody else willing to push for the same goals.

July

Can you explain how your theory is different from Keynes?

justinkatz

We're inside Keynes. Any plan to extract the economy will have to take that into account.

Here's the thing- small government advocates have (somehow) completely bungled the most important argument. Not that government is too large… but that government is horrifically wasteful. Its ungovernable. Republicans visibly wilt when Democrats claim they are starving old people and taking us back to Hooverville any time they want to slow (much less cut) spending. The growth in government belies that, just look at spending in real dollars under Clinton versus today (and I love the argument that we will agree to go back to Clinton tax levels in exchange for going back to Clinton spending levels). The truth is NOBODY can get their arms around just how wasteful our government is. Nobody understands it thoroughly, and nobody wants to. Americans fundamentally understand that we have a horrible level of corruption, graft, kickbacks, and waste. WE have to do the heavy lifting and go into the budget line by line and point out to people how programs X used to cost Y and produced Z, and now it costs Y times 2 but still produces Z. Thats understandable, that motivates people. But politicians wont do it.
TMLutas, I think we may be thinking along the same lines. What I think needs to be done is a crowdsourcing of the federal government. Nobody understands it, nobody puts a flashlight to anything (much less the nooks and crannies). If we leave it to politicians and bureaucrats, EVERY TIME they will chose the MOST important programs to cut… because they know they wont get cut. Thats the trick. A third party needs to grab hold of it and make concrete, exact, hyperspecific proposals.

Paul C

One persons killing regulations, is another’s reason for their business profits. Throw in government regulatory agency jobs plus K Street lobbyists dependent upon “protection fees”, that’s 3-4 against one.

The patients are dead. On life support. Changing the channel on the CNN feed won’t bring it back.

Charlie

Your tumor metaphor is apt, Mr Katz, and the real tumor is certainly not "on the table." Until it is dealt with, however, not spending cuts, not tax increases, not the opposite course, not stimulus, not nuthin' will work.

Briefly, 50 years ago, one person in 19 worked for government at any level (5.25% of us). We are now at 30 million workers in the public sector versus fewer than 150 million total jobs, or just more than one in five (21%) tax-paid workers.

Here's what people don't realize… yes, public workers feel the tax bite, but they do not pay taxes in the real sense as their compensation comes from tax revenue rather than earnings. Here's the effect, then, of this four-fold growth in the size of the public sector. Back in 1960, with government salaries below average, it took the total taxes of roughly two taxpayers to cover the compensation of one government worker. That left 16 out of every 19 taxpayers (84%) to pay for programs and spending. Sustainable.

Now public workers are compensated higher than average, and it takes the total taxes of roughly three taxpayers to cover one government employee. That leaves one, just ONE, taxpayer out of every five (20%) to cover EVERYTHING else. It cannot be done and thus becomes a formula for debt never-ending.

Until we drive government employment back towards 1960s ratios, nothing will work. And all of the silly comparisons to tax and fiscal policies of the 50s and 90s that are being thrown around on the left to justify higher taxes and continued high spending stand as absurdly meaningless owing to the crushing weight of government on our chest.

Erskine Harkey

This article and the graph make no sense to me. What are you advocating?

fred17

Charlie has it right. In addition, the ONLY cuts in spending will be cuts in the rate of increase in spending; i.e. no real cuts at all. It'll eventually be solved by total collapse.

Zon Toro

I think what Mr. Katz is trying to say is, that it's government regulation (and everything that goes along with it) that is largely responsible for choking off growth. The lack of robust (>3.5%) economic growth drives down tax receipts. Congress can't tax or cut enought to balance the budget if growth stays below 2%. (At 2% growth, our tax receipts only cover mandatory entitlement programs and debt service).

If Congress repealed Sarbanes-Oxley, The Patriot Act (at least the Dept of Homeland Security), Dodd-Frank, Obamacare, shuttered the EPA (or at least reduced its budget by half) and implemented some modest tax and entitlement reform, the economy would likely grow 3-5% per year even with Obama's tax on "the wealthy" or reductions in the discretionary budget. I work in a highly regulated industry, and you can't fully appreciate the drag it puts on business until you've had to deal with it first hand. It's even worse for small businesses where the owner is also the head of compliance.

Carolus

It's hopeless already. Consider this: only people who believe in really active, intrusive, interventionist, taxing and spending government become politicians, bureaucrats, and regulators. As government grows, they grow in numbers and influence. We're past the tipping point, years ago. I see no difference between Democrats and Republicans, except rhetoric. The substance is the same — they're all government growth pols. The future isn't what it used to be. We're rolling down the hill, inside a snowball, growing exponentially and crushing everything that stands in the way. Democracy seems increasingly unsustainable.

Guest

One way to go forward would be to do away with uncontitutional government departments. The constitution gives the federal government no authority over Agriculture, Education, and Energy, so the departments are dissolved, the workers fired, and the regulations abolished. A one page law would be required.

Then- watch how Agriculture, Education, and Energy production flourish. Success would perhaps encourage imitation in other fields such as Medicine, Labor, and Housing. Step by step we free ourselves. The biggest mistake is taking too big a bite at a time.

Abolishing the education department is a small bite? No, we need to map the education department, account for every line item, evaluate each lines performance over time compared to its history, and explain that this project in this department can be cut back to this level with demonstrably no effect on its mission. A big job? A huge job. But we leave it to the people who benefit from growing the size of these programs with no outside oversite, which any business executive would tell you is ludicrous.

Sadly, it seems that the power brokers and those with actual hands on the levers have little to no interest in anything that doesn't 1) help them maintain their hold on power, and 2) reward those who have assisted them in their ascension to that power.

Your treatise on this subject is insightful and informative. It may even work. Finding willing accomplices on both sides of the political center in numbers large enough to make a difference is the only thing unrealistic about this discusssion.

rearadmir0l

I think it would also be interesting to add the Fed rate and total amount of debt held by the Fed, if anyone even has a vague idea.

ebola131

You are arguing a meaningless point.
Even if somehow you could change the course of government and undo the past decades damage, it would take years to just stabilize the failing patient.
Peoples perceptions take time to change and we're out of time.
There will be a war, between government and those who would return to the Founder's vision.
If you keep on poking a Wolverine with a sharp stick, you're going to get your balls ripped off.

Mike

I so very much wish you were wrong.

Paul

Long term growth charts like this are hard to understand unless you use a log scale such that equal distances represent equal percent changes. All that you can really discern is the past two or three decades. With a log chart the growth can look very different.

justinkatz

Paul,

That's a good point. I've "zoomed in" across multiple charts for my own use. I originally didn't include the chart in this post, relying on the description and the link for interested folks. But I used a slice of the chart as the banner decoration, and somebody above pointed out that it was tempting to try to read it as a chart… but impossible, without a key. So, I threw the chart in at the end for reference.

askeptic

How about if the gov't just stops subsidizing everyone, and returns to its historical function of guaranteeing contracts (the Rule of Law), and providing a national defense?

Esteban

"Raise the debt ceiling for a while, but with the conditions that neither taxes nor spending increase…"

Yeah, right. (Big eye roll.) I wish I had a dollar for every time this solution has been floated and ignored. They always raise the debt ceiling "for a while" and spending never gets cut and they always want more in taxes. Then they keep making it easier and easier to borrow. The debt ceiling vote is practically pro forma at this point. And look at the Fed's printing press running hotter than a whore house on dollar day, debasing the cash you have in your pocket by the day.

This is our system. Learn to protect yourself within this reality or come out extra crispy when the house burns down.

ironau

I'm agreeing or disagreeing with the point of the article. I just can't be sure it's correct because the supporting data isn't accurate enough.

First it is NOT REAL dollar, inflation is included in these values. This is especially evident in the late 70's growth.

Second it purpose trims out the great depression which is a bias in selection.

The conclusions might still be the same, but unless those the bias intrinsic to the data is removed I can't be sure.